The Geostrategic implications of crude oil Analysis by Modern Diplomacy

Modern Diplomacy has published an article suggesting how the decision of OPEC+ to cut oil production can affect economies worldwide, including the US, the UK, the European Union and India. Caliber.Az reprints the article.

In the 33rd Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC, a group often referred to as OPEC+, ministerial meetings in Vienna decided to reduce oil production by two million barrels per day from November. Despite calls from the United States to pump more oil to support the global economy, oil-producing countries, including Russia and Saudi Arabia, decided to impose drastic output cuts to boost crude oil prices.

The decision to cut oil production can severely affect economies worldwide, including the US, the UK, the European Union and India.

Russia’s energy domination

Russia is the world’s third-largest oil producer, amounting to approximately 12 per cent of total production. The Russian Invasion of Ukraine led to sanctions on Russia, resulting in a decrease in supply. As a big importer of Russian oil, European countries face a massive energy crisis. Further, a significant cut in oil production will increase oil prices and lead to substantial difficulties for Europeans. Due to the price hike, Russia will gain more revenue to fund the Ukraine war. Since the US and Saudi Arabian have been traditional allies, Washington expected Riyadh’s support against cutting oil production to ease the energy crisis. Oil production cuts have drawn criticism from Washington and other importing nations. The US called the decision short-sighted and accused the Kingdom (Saudi Arabia) of siding with Russia while the global economy is dealing with a negative impact. OPEC+ cleared that move is purely economic, a response to stabilize the market and uncertainty about future demands for oil.

The US vowed to retaliate in reaction to the cut in oil production  and warned Saudi Arabia to prepare for ‘consequences.’

The US answers to OPEC

Energy policy is an instrument of the US foreign policy. Traditional ally has joined with a current adversary, Washington seems desperate to take away some power that Saudi Arabia and OPEC have. The US is examining policy tools and measures to express displeasure, and ‘NOPEC’ is one of those measures. The US may try to reduce control over energy prices by introducing the No Oil Producing and Exporting Cartel Bill or ‘NOPEC’ Bill. Being in discussion for over two decades, this bill aims to protect American consumers and businesses from the engineered oil price hike. It will enable the US to revoke sovereign immunity, which protects OPEC+ members and national oil companies from lawsuits. The US could take OPEC to federal court and punish them for weaponizing energy.

The US may push the coalition of the Group of Seven (G7) advanced economies, the European Union and Australia to place a cap on Russian oil prices to rob Russia of the revenue it needs to maintain its war in Ukraine. Through the price cap, the coalition of advanced economies may stop shipping insurance to buyers of Russian oil.

Saudi Arabia is the largest importer of arms from the US. Many foreign policy experts suggest America should retaliate by cutting off military equipment and hardware sales to Mohammad Bin-Salman (MBS) and denying him US intelligence, rendering the alliance debatable. It may leave the Saudis at risk of armed conflict with regional rivals like Iran.

How can the US deal with the energy crisis?

The US could exponentially increase the Strategic Petroleum Reserve (SPR) to decrease oil prices which it has maintained. The Biden administration directed the Department of Energy to release ten million barrels from SPR next month to control oil price hikes. The Biden Administration could include modern nuclear power plants in energy policy to further stabilize global energy markets and cripple the OPEC cartel and Russia, whose economy depends almost entirely on energy exports. Building new energy pipelines, transmission lines, and LNG terminals could help the US export surplus oil and natural gas to an energy-starved world. It may help Europe avoid future disruptions of energy supplies as long as sanctions remain against Russia. With the gradual progress of time, States learned that the enemy of an enemy is a friend. Hence, the US could lift sanctions on oil-producing countries such as Venezuela and Iran to maintain an alternate energy flow. Lifting sanctions may be naive as there is less difference between doing business with Saudi Arabia and Russia compared with Venezuela and Iran.

Effect on India

India is reeling under heightened economic downturns due to supply chain disruptions caused by the Russia-Ukraine crisis. The International Monetary Fund has recently downgraded the growth prospects of India at 6.8 per cent of GDP for the FY23 quarter since India imports more than 85 per cent of its oil requirements. Therefore, any tightening in the global oil market will have drastic effects on the Indian economy.

If the West controls price hikes by putting a cap on oil prices, India benefits as it would get oil at discounted prices. India will also be able to maintain diplomatic contact with Russia by not antagonizing its traditional western partners. This geopolitical calculation will put India in a “sweet spot” in the global energy market.

Conclusion

Considering the world is at the brink of an economic recession, the oil spikes could escalate the situation to financial disaster. The West is preparing to curtail price hikes by taking practical measures (NOPEC bill by the US and price cap strategies by developed economies). Hence, Russia, West Asia and the West are engaged in an energy war that could decide the fate of the world economy in the coming years. The energy crisis has reinforced the gulf’s importance in the global market, and nations want Saudi Arabia onboard. The prime interest of oil-rich countries except Russia is to look after economic interests through selling oil without being forced to take sides in the global forum. Additionally, the current situation provides a valuable lesson that any knee-jerk reaction by western countries in imposing price caps and sanctions can be counter-productive to the geopolitics of the world.